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At first glance, you might think so Shopify (NYSE: STORE) he had a disappointing third quarter. After all, the company, which provides a platform for anyone to establish an e-commerce presence, has seen its stock drop by more than 10% since it announced the results.
Nothing could be further from the truth. Growth stock investors should be reassured knowing that on virtually every metric Shopify is winning tons of customers. But there is an underestimated metric that really indicates how well the company is actually doing … and will continue to do so.
Image source: Getty Images.
First, the title numbers
We’ll get to that metric in a moment. But let’s recap Shopify’s third quarter with headline numbers.
| Metric | Third quarter 2020 | Third quarter 2019 | Growth |
|---|---|---|---|
| Enter subscription solutions | 245 million dollars | $ 166 million | 48% |
| Revenue of merchants solutions | $ 522 million | $ 225 million | 132% |
| Total revenue | $ 767 million | $ 391 million | 96% |
| Gross goods volume (GMV) | $ 30.9 billion | $ 14.8 billion | 109% |
Data source: SEC documents. Revenue figures are rounded to the nearest million.
Let’s go through this step by step.
- The value of all “stuff” sold on sites built using Shopify’s (GMV) platform more than doubled to $ 30.9 billion.
- For this reason, total revenue also nearly doubled to $ 767 million.
- While subscriptions (what merchants pay to use the platform) showed solid 48% growth, merchant solutions (mainly payment options when a customer buys something) rose 132%.
Put all these pieces together and you have a company that is fast becoming the most powerful nameless North American e-commerce giant Amazon.
The most important metric
When the pandemic hit, Shopify made it easier for merchants to sign up and kick tires on the platform. It has extended the free trial window to 90 days, compared to the standard 14-day trial. This has provided enough time for businesses of all sizes to transition without incurring costs. If those customers liked what they saw (and managed to stay in business), they would become paying customers.
Or at least that’s the narrative created by many investors (myself included). When the company revealed this news about monthly recurring revenue (MRR), it became clear that the narrative was true.
Image Source: Shopify Investor Relations.
As you can see, MRR growth was slowing in the third quarter, but once the 90-day trial window closed, it exploded to over $ 74 million. For those who track home, they annualize to nearly $ 900 million in virtually guaranteed revenue without a single sale happening on the platform.
Additionally, management pointed out in the earnings call that there would also be a record number of signups without the effect of closing the 90-day window.
Shopify President Harley Finkelstein said, “In the third quarter, a record number of merchants became paid subscribers to Shopify, even excluding merchants who converted after the end of their 90-day extended free trial. The extended free trial. made it easier to access new online stores quickly and make sales, allowing many of these entrepreneurs to generate money while their physical stores were closed at the start of the pandemic. “
The moat widens
Why is all this important? Because Shopify has a huge moat. Considering:
- High switching costs: When a smaller business sets up a website and social media presence via Shopify’s platform, they don’t want to waste time switching to a new provider. Doing so is expensive and time-consuming. It is also a distraction.
- Network Effects: Shopify has a marketplace where third-party app developers (read: non-Shopify employees) can sell their tools. When they do, they get instant access to Shopify’s stable of over a million merchants. The more merchants they join, the more incentivized these developers are to build on the Shopify platform, attracting more merchants. There are currently over 5,300 such apps, many of which can’t be found anywhere except Shopify.
Bottom line: Once merchants get into the Shopify ecosystem, they’re probably there forever. It is true that many of these businesses will fail, but this is how an economy works hypothetical to work. With so many merchants joining in such a short amount of time, Shopify has just woven a huge network that promises to deliver even more successful merchants for years to come.
Takeaway investor
Yes, Shopify’s stock has been on a downward trend over the past month. But no, you shouldn’t worry too much. Let’s not forget that the stock has almost tripled since it hit bottom in mid-March. We shouldn’t worry too much about short-term moves.
The company’s MRR growth is a key indicator that the pipeline for future growth is strong. With Shopify already accounting for over 14% of my holdings in real life, I won’t be adding shares, but I definitely won’t be selling anytime soon.
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